CEOs offer to give up tax breaks for U.S. reforms

Tax code as currently written hurts economy, execs tell Congress

WASHINGTON (MarketWatch) — A handful of top executives told Congress on Wednesday they would give up most of their tax breaks in exchange for lower corporate rates and a simplified U.S. tax system.

CEOs of Wal-Mart Stores Inc.
WMT, -0.37%
Kimberly-Clark Corp.
KMB, +1.07%
CVS Caremark Corp.
CVS, +2.59%
and semiconductor company PMC-Sierra Inc.
PMCS
said corporate taxes in the U.S. are too high and complicated to administer.

Tax reform would create jobs at home, allow American companies to compete better with overseas rivals and make the U.S. a more attractive place to set up shop for both domestic and foreign firms alike, they said.

The current federal tax on corporations is 35%, with rates ranging from zero to nearly 10% among U.S. states. Yet most companies use a variety of breaks to pay a lower “effective” tax rate.

In Canada and most European countries, corporate rates are lower. Canada recently trimmed its federal rate to 16.5% from 18%, for instance, while U.K. companies are subject to a 28% statutory rate.

A combined state-federal tax rate in the low-to-mid 20% range, the executives said, would make U.S. firms more competitive against global rivals.

“We need a rate that is meaningfully lower in order to spark investment and job creation,” said Mike Duke, the chief of leading discount retailer Wal-Mart. Last year, Bentonville, Ark.-based Wal-Mart paid an effective tax rate of 32.2% on its U.S. profits.

The executives testified at a Senate Finance Committee hearing called to consider ideas on how to reform the tax code. Lawmakers are looking for ways to boost a weak economy and stimulate more hiring to drive down the nation’s unemployment rate, which stood at 9.2% in June.

Both political parties appear to have coalesced around the idea of an overhaul of a tax code that most politicians agree is outdated and inefficient.

If the government were designing it from scratch, “nobody would ever come up with the tax system we have, ”said Sen. Kent Conrad (D., N.D.).

Yet tax reform has proven in the past to be politically difficult to pull off: Many companies usually lobby against the loss of tax breaks that benefit them, and lawmakers are loathe to reduce support for pet causes.

Lawmakers also want to make sure tax reform doesn’t reduce overall corporate payments at a time of soaring U.S. deficits.

“It’s not easy to get the rate down to 28% or lower,” said Sen. Max Baucus (D., Mont.), chairman of the Finance Committee. “It’s not easy.”

‘Be bold’

Asked if they would give up most or all of their tax breaks, three of the four executives appeared to suggest they would.

Thomas Falk, Kimberly-Clark’s CEO, said he would exchange tax breaks for manufacturing and research and development if the company’s combined corporate rate was sharply lowered.

“In a crisis amazing things can be done,” he said. “I urge you to be bold and do things that could not be done in ordinary times.”

Yet CEO Greg Lang of PMC-Sierra said he would still like Congress to retain the R&D tax credit. The credit spurs more hiring in the U.S., he said, and keeps PMC competitive with Asian rivals that pay even less in taxes than European companies.

Executives also unanimously called for a move to a territorial tax system like most other major countries. The U.S. taxes the money earned by domestic companies overseas, but other countries do not.

The profits earned by Wal-Mart in China, for example, are subject to a 25% Chinese tax rate and then an additional 10% in the U.S. However, Tesco PLC (TSCO), Wal-Mart’s U.K. rival, only pays the Chinese tax.

As a result, U.S. companies leave hundreds of billions of dollars sitting overseas instead of bringing it back home to pay the U.S. tax on foreign earnings.

“Having those dollars overseas looking for investments does nothing for the U.S.,” Lang said.

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